Two Good Reasons To Buy GlaxoSmithKline plc Today

Yesterday’s news that GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) had sold Ribena and Lucozade to Japanese drinks giant Suntory Beverage & Food Ltd was bound to make headlines, as journalists picked up on the sale of yet more British food and drink brands to foreign companies.
Personally, I’m more interested in Glaxo’s prospects as a pharmaceutical business, and I was pleased with the terms of the deal. The £1.35bn price tag is equivalent to 2.6 years’ sales, and is probably 10-15 times the annual profits generated by the drinks.
Despite this, the deal wasn’t enough to move Glaxo’s share price, which has…

Keep Reading

Register by giving us your email below to continue reading all of the content on the site. Soon you will also begin to receive our FREE email newsletter, The Motley Fool Collective. It features straightforward advice on what’s really happening with the stock market, direct to your inbox. It’s designed to help you protect and grow your portfolio. (You may unsubscribe any time.)

We will use your email address only to keep you informed about updates to our web site and about other products and services that we think might interest you. The Motley Fool respects your privacy! Please read our Privacy Statement.

Yesterday’s news that GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) had sold Ribena and Lucozade to Japanese drinks giant Suntory Beverage & Food Ltd was bound to make headlines, as journalists picked up on the sale of yet more British food and drink brands to foreign companies.

Personally, I’m more interested in Glaxo’s prospects as a pharmaceutical business, and I was pleased with the terms of the deal. The £1.35bn price tag is equivalent to 2.6 years’ sales, and is probably 10-15 times the annual profits generated by the drinks.

Despite this, the deal wasn’t enough to move Glaxo’s share price, which has fallen by 5% since June, thanks to two separate problems faced by the company. Sceptics are calling Glaxo a sell, but I reckon these two problems are simply a good buying opportunity.

China fiasco

China is expected to become the world’s second-largest market for pharmaceutical firms over the next decade. Its population of 1.3bn is enjoying rising incomes and a move to urbanised living, both of which will increase access to, and demand for, western-style healthcare.

Glaxo saw the opportunity in China, but if current allegations that the firm funded up to £320m of bribes to Chinese doctors are proved to be true, it appears to have grasped at it rather too eagerly.

Various media reports are suggesting that Glaxo may now withdraw from China to avoid a hefty fine, and allegations of corporate bribery, but I think this is simply a negotiating tactic. I don’t think that a withdrawal is in the interests of Glaxo or of the Chinese authorities, and expect a settlement.

Patent cliff?

As I write, Glaxo’s share price is down by around 3% on this morning’s opening price. The reason for this is that the US Food and Drugs Administration has unexpectedly issued guidance suggesting that it will licence generic replacements for Glaxo’s inhaler drug, Advair, which has global annual sales of $8bn.

Advair’s active ingredients are already out of patent, but the inhaler device with which it is delivered is protected until 2016, after which it now appears that Advair sales may fall, as cheaper generic competitors enter the market.

However, this needs to be seen in context. Glaxo’s product pipeline is seen by analysts as being much healthier than that of its UK peer AstraZeneca, and it has two full years before any generic replacements for Advair can hit the market.

Buying opportunity?

Glaxo’s 4.7% yield and growth potential make it a buy for me, and it’s worth noting that GlaxoSmithKline is also one of the eight biggest holdings of top UK fund manager Neil Woodford.

Mr. Woodford’s funds have delivered outstanding returns for his investors — if you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!

Looking for a low-cost Share Dealing service?

Our preferred partner, interactive investor, offers all the knowledge, tools and information you need to be a confident investor. Whether you’re looking for an everyday trading account, making the most of your ISA allowance or planning for your retirement, they provide great value for money, through simple, fair and clear charges, so it’s easy to work out what it costs to invest.